Dear Workforce How Do We Decide Whether to Outsource Payroll or Bring It In-House

September 7, 2011

Dear Overwhelmed:

Payroll is one of the most complex processes found in the financial operations of companies these days. Not only do payroll administrators need to keep track of federal income tax and benefits regulations, they also must be aware of state wage and hour regulations in every state in which you operate. Most small to midsize firms find it much more economical to outsource this complicated and demanding function. It is only when you reach 1,000 or more employees that you find companies being able to afford the expense associated with maintaining payroll in-house. Even then, these firms usually have access to a variety of outside services that support their legal and regulatory needs related to payroll. If your company is growing rapidly, you may want to study this possibility further. Here are some of the relevant factors to consider in any analysis:

How quickly is your company growing? Are you looking to make a significant number of acquisitions or expand internationally over the next several years?

How complex are your payroll needs? Look at things like how many hourly employees you have, the different work/shift schedules, and which types of deduction codes and earnings types your company uses. Another indicator of complexity would be a lot of different bonus or other cash compensation programs.

How many distinct payrolls does your company run each month? How many physical checks or deposit stubs do you generate each month?

Are state regulations (in the 39 states) complex and demanding? Illinois, New York and California have some of the most complicated wage and hour regulations on the planet.

Do you have access to payroll expertise (including outside expert resources) to assist with preparing a formal cost/benefit/return on investment analysis?

What is the level of IT support at your company? Is your IT department capable of managing another system?

Do senior executives understand the complexity, and are they willing to support the conversion with needed resources?

These are some of the more critical questions you will need to consider in the decision to source payroll or bring it in-house. If your company decides to move to another vendor rather than insource, here are some of the significant considerations:

Is the vendor financially stable? How long has it been in business? What is its track record in meeting commitments? Check references in detail.

How strong are the vendor's project management capabilities? Does the firm have expertise in all aspects of project management, including project planning, tracking, control, and management?

What capacity does the vendor have for bringing your company on board with them? Will you have a dedicated service team?

Does the vendor operate nationally? With 39 states, you might as well not even consider firms that have not had experience in all 50 states.

Does the vendor serve similarly sized organizations that are growing rapidly? Does it serve organizations that operate internationally (presuming this is a factor)?

Does the vendor have experience with companies in your industry? If so, quantify that experience?

Can you trust the confidentiality of the vendor? Does the vendor also serve your competitors?

Finally, can the vendor manage the variety of your company's payrolls?

Many of these questions will form the basis for a formal request for proposal that you will send to a select list of vendors. Using these lists as a starting point, you also may want to check with your business colleagues/professional associations to find people who have gone through this type of change and are willing to share their experiences. This type of change should not be done in a "quick and dirty" manner. Invest the time and resources into making the right decision for your organization.

LEARN MORE: Please read how companies large and small have begun to contract our more HR administrative tasks.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.